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Massachusetts – Taxability of Freight Insurance Charges

SALT Report 2317 – The Massachusetts Department of Revenue issued a Letter Ruling regarding the application of sales tax to freight insurance charges that are billed to, and paid by, the customer. The Taxpayer resells test equipment and information technology products to customers around the world. When an order is received, the Taxpayer will either have the manufacturer drop ship the product to the customer or, the Taxpayer will ship it directly from one of its warehouses using a third-party common carrier. Every shipment includes a freight insurance charge.

The Taxpayer requested guidance as to whether its freight insurance charges are subject to sales tax if they are separately stated on the invoice provided to the customer.

In its response, the Tax Commissioner stated that a “transportation charge is a charge by the seller of tangible personal property for the preparation of and the delivery of goods to a location designated by the purchaser.” The Department’s policy regarding the application of sales tax to transportation charges is that these charges are excluded from the sales price subject to tax provided they:

Reflect the cost of preparing and moving the goods to a location designated by a retail customer,

Are separately stated on the invoice to the customer, and

Are set in good faith and reasonably reflect the actual costs incurred by the vendor

Based on the facts presented, the Commissioner stated that the Taxpayer’s freight insurance charge does not qualify as a component of preparing or moving a product to the customer. Specifically, the Commissioner referred to Directive 04-5 which states that transportation charges are limited to “postage, freight, shipping, handling, transportation, shipping and handling” and that “crating or packing” are the activities that are necessary to prepare a product for shipment to a buyer.

As a result, the Commissioner determined that the Taxpayer’s freight insurance charge does not “prepare goods for shipment and does not move goods” from the Taxpayer to a customer. Therefore, the freight insurance is not a transportation charge, and cannot be excluded from the sales price subject to tax.